SECTION 149
Restriction
on commencement of business
[1936] 6 COMP. CAS.
440 (MAD.)
v.
VARADACHARIAR AND
HORWILL, JJ.
O.P. NO. 306 OF 1935
APPLICATION NO. 490
OF 1936
P. Narayana Kurup for Appellant.
K.S. Rajagopala Ayyangar and K. Ramanatha Shenai for Respondents.
Horwill, J.—This application arises out of the liquidation proceedings of the South Indian Film Corporation Ltd. The company had to meet very great initial expenses by way of apparatus and payments of a large staff until the film "Kowsalya" had been made. The only asset upon which any money could be raised was the screening rights of the film "Alli Arjuna" which was not very successful and did not bring in a great deal of money. In March 1935 some proceedings were instituted in this court for the winding up of the company and the Directors feared that as the result of these proceedings although in the end they were dismissed, it would be difficult for the company to obtain all the money it needed from calls. On the 19th of May 1935 a resolution was therefore passed, Ex. A. 1, whereby the Managing Agent Mr. Venkatrama Ayyar was authorised to raise money on the security of the assets of the company, not exceeding Rs. 25,000.
Soon after this, according to the evidence of the claimant Mr. Sreenivasan, he was approached by Mr. Venkatarama Ayyar and the resolution shown to him. He was asked if he would advance some money to the company as they were short of cash, but hoped that as soon as the film was made they would make a good profit. Mr. Sreenivasan was anxious to make further enquiries in the matter and on his return to Madras from Coonoor, where he was staying when interviewed by the Managing Agent, he halted at Bangalore to meet the Chairman of the company, Mr. K.R. Sreenivasa Ayyangar, and after some hesitation agreed to advance certain sums of money on the understanding that a charge deed would be executed when he had advanced all the money that was necessary. It was not then possible to be sure what amount would be required and the understanding was that the money should be advanced as and when required. The amounts advanced were Rs. 1,000 Rs. 2,500, Rs. 1,500, Rs. 1,000, Rs. 1,000 Rs. 1,000 and Rs. 4,000 on 5-8-1935, 15-8-35, 20-8-35, 18-9-35, 25-9-35, 7-10-35 and 8-10-35, respectively. The charge deed Ex. D was executed on 22-10-35, in pursuance of the resolution dated 13-10-35.
The question that came up for decision in this application by Mr. Sreenivasan was whether the charge created by Ex. D was a valid one. The learned Trial Judge held that it was a valid charge because at the time the charge was created the company was solvent and also because the money had been paid in consideration of a promise to charge the property. The respondent, the Kodak Company Madras, have filed this appeal.
The letters between the Managing Director Mr. Venkatrama Ayyar and the Chairman Mr. K.R. Sreenivasa Ayyangar throw a great deal of light on the condition of the company and the circumstances under which this money came to be borrowed. Rs. 3,500 were paid by Mr. Sreenivasan without much delay; but it is contended that the remaining advances at the end of August and in September were made, not because of the promise of a charge, but because Mr. Sreenivasan was an old friend of Mr. Venkatarama Ayyar and was himself interested as a shareholder in the affairs of the company and also because all the directors of the company were his friends. With respect to the last two items, amounting to Rs. 5,000 it is argued that the affairs of the company at that time were in a very serious state. but that nevertheless Mr. Sreenivasan was content to look to two directors, Mr. Raman and Mr. Seshayya, to guarantee the loan. Ex. D is said to have been executed as an inducement to Mr. Sreenivasan to lend the remaining Rs. 5,000 which were urgently due. The letter Ex. H dated 22-5-35, shows that the Chairman of the Company Mr. K.R. Sreenivasa Ayyangar, was beginning to feel rather anxious because the company was spending large sums of money without corresponding income. On that day he wrote Ex. H to the Managing Agent asking him to take steps to secure a loan in order that the shareholders might see that the company was enjoying a good credit and was progressing in a satisfactory way. Mr. Venkatrama Ayyar replies by H-1 to the effect that things are going on as well as could be expected and that it was not necessary to be so anxious. He pleads for the full cooperation of the Directors in order that the confidence in the company should not be shaken in spite of the proceedings which had been filed in the High Court.
In the same letter Mr. Venkatarama Ayyar says that he has been able to meet Mr. Sreenivasan and has broached the subject of the loan and that Mr. Sreenivasan had promised that he would write to the Chairman and consider the matter. By Ex. J Mr. K.R. Sreenivasa Ayyangar further elaborates his contention and says "All these difficulties would be got over if we succeeded in raising the loan": the unpaid share capital which we shall be calling being security for the loan along with other assets of the company". In his reply letter Ex. J-1 Mr. Venkatrama Ayyar states that he has already issued the second call without caring to wait for the loan, that he had not heard from Mr. K. Sreenivasan about the loan and would write as soon as he did hear. In Ex. J-2, another letter by Mr. Venkatrama Ayyar, he pleads that the Chairman should not spoil the working of the company by over anxiety and draws the attention of the chairman to the fact that he (Venkatrama Ayyar) is the largest shareholder in the company and has got as great an interest as anybody else in seeing that the company functions properly. At that time it is clear that Mr. Venkatrama Ayyar had no fear that the company would go into liquidation, for he writes: "I am sure you will forget the bogey of liquidation from your mind and give me that co-operation and trust which I readily expect from you".
In Ex. K. which was a third and final reminder issued by the Company to the shareholders over the signature of the Managing Agents, the shareholders are told: "If you don't send money immediately we will have only to borrow money from outside by mortgaging our assets and paying an uneconomic interest". This circular also refers to the resolution of the Directors authorising the Managing Agents to raise a sum of Rs. 2 ,000 by giving a charge on the assets of the company. It is common ground that on or about the 8th August 1935 the Chairman, Mr. Sreenivasa Ayyangar, came to Madras and had a talk with Mr. Sreenivasan about this loan. In the final letter in this series, Ex. L dated 17.8-1935, Mr. Venkatrama Ayyar corroborates the evidence regarding this meeting in Madras, for we find in this letter to the Chairman by the Managing Agents: " I have borrowed Rs. 3,500, from Mr. K. Sreenivasan of the Hindu for temporary use. I have arranged for a loan of Rs. 10,000 which will be got in the course of next week, and I will send the papers for your signature".
It is seen from this correspondence that the negotiations between the company and Mr. Sreenivasan are what one would expect in bona fide dealings between the company and the person from whom the company was to borrow money: and there was nothing in these negotiations which in any way raises a suspicion that all the loans were not made in pursuance of or on the strength of the resolution dated 19-5-35, Ex. A-1. The evidence is to the same effect. The claimant has examined himself and the Chairman, while the appellant examined Mr. Venkatrama Ayyer who, in the chief examination, was inclined to support the case of the appellant by saying that the money was not advanced in contemplation of a charge on the company's assets. In cross examination he admitted all the facts narrated by the and his witness in their evidence. The claimant's evidence with regard to the circumstances under which the final Rs. 5,000 were advanced is corroborated by the Assistant Manger of Kodaks, Madras, examined for the appellant. Before the final Rs. 5,000 were advanced the film "Kowsalya" had been made and exhibited. On account of the failure of the film, considerable anxiety was naturally felt by those concerned and Mr. Sreenivasan was very reluctant to advance any more money. He had interview with the chairman and with two directors Mr. Raman and Mr. Seshayya, and he even consulted Kodak's Assistant Manager, Mr. Ramayya. The latter gave it as his opinion that if the film were rectified a little, it would be a success. The hopes of the company rested not only on this film but on the possibilities of producing other films whose success might in some way compensate for the losses sustained on "Kowsalya". At this stage, Mr. Sreenivasan, knowing that there was an offer of a charge in the resolution of the company of 19-5-85, would surely not have continued to advance money merely on the guarantee of two directors. We therefore find no justification either in the documents or in the evidence for a belief that Mr. Sreenivasan at any time advanced his money merely as a friend and as one interested in the company. Admittedly, he knew of the existence of this resolution and he was approached for a loan soon afterwards; and we must presume that as a businessman he lent his money on the strength of this resolution.
Much has been made of the fact that no document was executed before 22-10-35, when the affairs of the company were not in a good way; but the reason for this is clear from the evidence, in that Mr. Sreenivasan would at no time promise to advance any specified sums of money, and the company had already informed him that they did not want a lump sum but would like him to advance the money as it was needed. There are therefore as far as we can see no suspicious circumstances about these transactions which would lead one to suppose that the loans were made on conditions other than those to which the witnesses speak.
In view of the finding on the above point, it is unnecessary to consider whether the company immediately after the creation of the Charge was solvent. Whether the company was solvent or not would depend to a large extent upon whether the company was still a running concern at that time or whether the property in its possession would be worth only what it would fetch in the market. Another rather difficult question would also arise as to how far the unpaid call money could be treated as assets of the company. We therefore do not propose to decide this point.
It is argued that this charge or transfer was a fraudulent one made to defeat the many creditors of the company and therefore void by virtue of S. 231 of the Companies Act. We do not however find anything in the evidence either oral or documentary, which suggests fraud and the transaction Ex. D cannot therefore be a fraudulent one. We have been referred to In re Jackson, Jackson v. Bassford [1906, 2 Ch. 467] in which case an agreement to charge the assets of the company was made long before the document was actually drawn up: and it was found that the reason why the document was not executed until the company had become insolvent was that the grantor feared that if a document was executed and registered under S.14 of the (English) Companies Act the credit of the firm would suffer, because the creditors would be able to know that this charge had been created. It was held that in such circumstances there would be fraud on the part of the grantor in which the grantee participated, and that the charge was therefore void, for otherwise the provisions of S.14 could always be avoided by an unscrupulous company. That case has no parallel here, and we find no reason to think that the execution of the charge was deferred in order to protect the credit of the company. As already stated, the reason for the postponement was that it was uncertain how much money would be advanced, it being agreed that it was only after all the advances had been made that the charge deed would be executed.
Another objection has been raised that the company was not entitled to borrow money in that one of the directors by name Ramanathan Chetty, had not paid the money payable on application and allotment. This seems to be true on the materials before us, though the point was not raised before the lower court; but as is seen from S. 103 (2) a certificate issued by the Registrar is conclusive evidence that the company is entitled to commence business. Some distinction is sought to be drawn between the powers of a company to commence business and to borrow money in that the certificate of the Registrar relates only to the commencing of business and not to the borrowing of money. But the qualifications required for the commencing of business and the borrowing of money are precisely the same, namely, that the money payable on application and on allotment should have been paid by all the directors. We find that there is no basis for this distinction; for it is clearly intended that upon the issue of a certificate under S.103 by the Registrar, the company should be entitled not only to commence business but to borrow money. The creditors are not expected to know whether in fact the money due on application and allotment has been paid up and all that is required of them is that they should ascertain from the Registrars' office whether he has granted the certificate or not. If he has granted the certificate, they are entitled to conclude that the directors have made the necessary payments and that there is no technical bar to the advancing of loans.
In the result the appeal is dismissed with the costs of the first respondent. The Official Liquidator will get his costs from the estate.
[1932] 2 COMP CAS 0407 (LAHORE)
HIGH COURT OF
LAHORE
BHIDE, J.
PETITION NO. 589 OF 1930
OCTOBER 27, 1931
Qabul Chand, for the Petitioner.
Madan Gopal, for the Respondent.
Bhide, J.—This was an application
under section 215 of the Indian Companies Act by
Messrs. Khanna & Co., voluntary liquidators of the Merchants Ltd., Lahore.
It was alleged in the petition that the Merchants, Ltd., Lahore, which
was incorporated in November, 1929, went into liquidation voluntarily on the
25th of June, 1930, as it was unable to meet its liabilities; that the
shareholders mentioned in the list attached to the petition
were called upon to make their contributions, but failed to do so; and that the
present petition was therefore filed requesting the Court to enforce
payment of the same. The petition was resisted by six of the shareholders
mentioned in the list referred to above; five of them were represented by Mr. Madan Gopal, Advocate, while the sixth
appeared in person. The case proceeded ex parte against the remaining shareholders, who
did not appear in spite of service.
The petition was resisted by the contesting shareholders on a
number of grounds; but after
hearing arguments it seems to me that two of them are fatal to the petition,
namely, (1) that the appointment of the liquidators was not valid according to law, and therefore, the petitioners had no locus standi
to maintain this petition and (2) that there are no liabilities of the Merchants Ltd., which could be legally enforced and,
therefore, the shareholders cannot be called upon to make any contribution.
As regards the first point it appears that the petitioners where appointed liquidators by an extraordinary resolution passed on the 25th June, 1930. It is, however, urged on behalf of the contesting shareholders that the appointment should have been made by a special resolution and not by an extraordinary resolution, as the company had admittedly not commenced business. It is contended further that notice as regards the 'extraordinary' resolution was not given in accordance with law and that the resolution has also not been shown to have been passed by a majority of not less than three-fourths of such members entitled to vote as are present in person or by proxy as required by section 81 of the Indian Companies Act. These objections appear to me to be sound. Section 203 of the Act lays down the different ways in which a company may be wound up voluntarily. According to clause (3) of that section a company may be wound up voluntarily, by means of 'an extraordinary' resolution to the effect "that it cannot by reason of its liabilities continue its business, and that it is advisable to wind it up. In the present instance the company had admittedly not commenced its business, and therefore no question of any 'continuance' of business could arise. It seems to me, therefore, on the wording of the section that the proper course in the circumstances of the case was to pass a 'special' resolution as required by clause (2) of section 203. However, even assuming that the company could have been wound up by an 'extraordinary' resolution it seems to me that no such resolution was passed in accordance with law. It appears that the notice of the 'extraordinary' resolution, which was given in the present instance, did not state that the resolution was to be passed as an 'extraordinary' resolution (vide clause (1) of section 81 of the Indian Companies Act). The notice, no doubt, stated that the meeting was to be an ‘extraordinary' meeting but this did not necessarily imply that the resolution was to be moved as an 'extraordinary' resolution within the meaning of section 81. The wording of the resolution also was not given in the notice, and it was not stated in the resolution that it was advisable to wind up the company. The only members present at the meeting were Kidar Nath Kapur, Dwarka Nath Kapur and Amar Nath Mehta. Four others are alleged to have sent proxies in favour of Kidar Nath Kapur. According to Article 73 of the articles of association of the company only those shareholders, who had paid up the amount due on their shares, were entitled to vote. It has not, however, been shown that the persons present at the meeting or those who sent proxies had paid up the amount due on their shares and were, therefore, entitled to vote. In view of all these facts it appears to me that the resolution as regards the winding up of the company was not passed in accordance with law and consequently the appointment of the liquidators also cannot be held to be valid.
The second
objection, namely, that the Company has no liabilities which could be legally
enforced also appears to be correct in view of the provisions of section
103 of the Indian Companies Act. According to sub-section
(3) of this section "any contract made by a company before the date at
which it is entitled to commence business shall be provisional only, and
shall not be binding on the company until that date, and on that date it shall become binding." In the present instance it is
admitted that the company had not fulfilled the requirements of clauses
(a) to (c) of sub-section (1) of section 103 and was therefore, not entitled to
commence business. As a result, the liabilities of the company which have been
proved in this case, namely
certain debts alleged to be due to the managing director and on account of rent
and printing charges cannot be held to be binding on the company: of. In re Otto Electrical Manufacturing Co.,
[(1906) 2 Ch. D. 390] and In re Blair Open Hearth Furnace Co. [(1914) 1 Ch. D.
390 at 409.]
In view of the conclusions arrived at above, it is not necessary
to dicuss the remaining grounds urged on behalf of the contesting shareholders.
The petition is accordingly dismissed.
As regards costs, it was urged on behalf of the shareholders that
the petitioning liquidators should be made to pay them as the company cannot be
held to be legally liable. On the other hand, it is contended for the petitioner
that they have acted in good faith and should not be made to suffer for the
faults of others. In view of all the circumstances, I think, it will be on the
whole equitable to leave the parties to bear their costs, and I direct
accordingly.
[1950] 20 COMP. CAS. 160 (CAL.)
HIGH COURT OF
CALCUTTA
SINHA, J.
FEBRUARY 9, 1949
R. Chaudhuri, for the Official Liquidator.
Samar Sen, for the claimants, Sharada Agencies.
Sinha, J.—This matter
has come before me for settlement of the list of debts and claims.
The company was incorporated on the 5th of April, 1945. The
company never carried on any business nor was any commencement certificate
taken. Certain applications were made for shares in the company and a total sum
of Rs. 78,750 was paid to the company by intending shareholders. The money
received from the shareholders was deposited with the Central Bank of India,
Ltd., Clive Street Branch. A sum of Rs. 445-14 has since accrued as interest on
the said deposit.
As the promoters of the company found it difficult to
commence business of the company, at a meeting held on 10th March, 1947, it was
resolved that the share money received from the applicants should be refunded
in full to the respective applicants. It was also resolved that the Central
Bank of India be requested to honour the cheques in respect of such refund by
debiting the current account of the company. The Central Bank of India,
however, did not agree to pay.
On 28th April, 1947, the Registrar, Joint Stock Company,
issued notice under Section 247 of the Indian Companies Act for striking out
the name of the company from the register and on 18th September, 1947, the
company's name was struck off.
On 31st October, 1947, a resolution was passed for
voluntary winding up of the company. The Central Bank of India, however, did
not agree to pay out the money deposited in the current account of company in
the bank in spite of the said resolution.
On 12th March, 1948, an application was made "In the
Matter of the Trustees Act" for distribution of the money lying with the
Central Bank of India amongst the shareholders. On 12th April, 1948, Das, J.,
treated the application as an application for restoration of the company under
Section 247 of the Indian Companies Act and made an order for restoration.
On 15th April, 1948, an application was presented for
winding up of the company. On 10th May, 1948, the winding-up order was made and
Mr. G.S. Mukherjee was appointed the Official Liquidator. The Liquidator
advertised in the papers inviting claims against the company. No claim was
filed.
On 1st December, 1948, I gave directions for filing the
list of creditors and contributories.
The Liquidator has filed an affidavit and in the first part
of Annexure A to the said affidavit the names of the intending shareholders who
deposited money with the company for taking shares have been set out. In the
second part of Annexure A the claim of Sharada Agencies for Rs. 7,913-5-3 has
been set out but the claim is not accepted by the Liquidator.
An affidavit was filed, affirmed on 24th January, 1949, by
Sharada Agencies, a partnership firm carrying on business at 22, Canning
Street, claiming a sum of Rs. 7,913-5-3. As the affidavit did not disclose
sufficient materials, I gave directions for the filing of a further affidavit
in compliance with which a fresh affidavit has been filed by Rati Lal.
It appears from the affidavit
that Sharada Agencies is a partnership firm and they were appointed the
managing agents by the articles of association of the company for a period of
twenty years from the date of incorporation at a monthly allowance of Rs. 2,000
in addition to a commission on the annual net profits of the company. It is
claimed that the said firm paid Rs. 4,008-11-3 under the directions of the company's
directors on account of the expenses incidental to the formation of the
company. They also claim to have paid Rs. 3,904-10 on account of expenses after
its incorporation and for its management. The relevant vouchers have been
annexed to the affidavit.
As regards pre-incorporation
expenses, there can be no doubt that they are not payable by the company. It
was conceded and, I think, rightly, by the learned counsel for the claimants
that they could not claim pre-incorporation expenses in the liquidation
proceedings. I, therefore, hold that the company is not liable for costs and
expenses incurred in respect of its formation and promotion.
Learned counsel, however,
contended that expenses incurred by the claimants after incorporation should be
allowed. They consist of stamp and registration fees for registering the
company and for postal and other charges and publicity and travelling expenses.
I am not quite sure whether all these expenses were made after the
incorporation. Stamp and registration charges seem to me to be really
pre-incorporation expenses. Be that as it may, I do not think the claimants are
entitled to be paid for these expenses and for the following reasons.
Section 103(3) of the Indian
Companies Act provides as follows:—
"Any contract made by a
company before the date on which it is entitled to commence business shall be
provisional only and shall not be binding on the company until that date and on
that date it shall become binding."
It was held in In re
"Otto" Electrical Manufacturing Company [1905] Limited under the
corresponding section of the English Act that the section applied to all
contracts of a company, whether preliminary or final or in the course of
carrying on its business.
In that case, one Mr. Jenkins
bought some furniture for £ 240 and put it into an office which he took for the
company. He claimed the money. The claim was disallowed as the company had
never become entitled to commence business. Buckley, J., said as follows:—
"How does he claim?
Obviously in contract; he claims upon this ground that, expressly or by
implication, the company promised to pay him
for the furniture if he would pay the furniture dealer for it. Of course, that
is contract. The Act of Parliament says that that contract is not binding on
the company, and he cannot sue here. The other claims are for moneys which he
advanced to a man to come up to town when he was going to serve the company,
and other payments of a like kind. They are all claims in contract. In my
judgment he cannot be heard to say that there was such a contract; the Act of
Parliament forbids it."
He also observed that the word "provisional" in
the section means that the contract is to be read as if it contained a
provision that it shall not be binding on the company unless and until the
company became entitled to commence business.
Mr. Sen contends that under Section 70 of the Indian
Contract Act, his clients are entitled to claim the expenses incurred after the
incorporation of the company. I do not agree. I think that inasmuch as the
company never became entitled to commence business, the expenses were not
incurred for its benefit. Further, the Section does not apply to persons who
are incompetent to contract. It can only apply where the law can imply, from
the circumstances, a promise to pay. Where the statute prohibits the company
from making a binding contract before commencement of business, no implication
of a promise to pay can or should be made.
Mr. Sen next contended that his clients were entitled to
recover registration fees and expenses inasmuch as the company was under a
statutory liability to pay them. In support of his contention, he referred me
to the judgment of Buckley, J., in In re, English and Colonial Produce Company
Limited.
This judgment, however, was overruled in In re, National Motor Mail-Coach
Company Limited
where Cozens-Hardy, M.R., observed as follows:—
"I need hardly say that any opinion expressed by
Buckley, J., especially upon this branch of the law, deserves the greatest
respect, but I cannot concur in the view which he took, and Mr. Eustace Smith
confessed that he had not been able to find any other authority differentiating
between a statutory liability and any other liability in relation to this
question. There is no other ground upon which the judgment can be supported,
and I know of no principle or authority on which that distinction can be
maintained."
The result is that the claim of Sharada Agencies must be
dismissed. I settle the list by deleting the claim of Sharada Agencies.
[1991] 72 COMP. CAS. 333
(KER)
HIGH COURT OF KERALA
v.
Capital Stock Exchange Kerala Ltd.
K.A.
NAYAR, J.
O.P.
NO. 880 OF 1991-D.
FEBRUARY 5, 1991
O. Balanarayanan for
the Petitioner.
MoUy Jacob for the
Respondent.
JUDGMENT
K.A.
Nayar, J.—This original
petition is for a writ for quashing the registration of the first
respondent-company under the Companies Act, and the certificate issued by the
Registrar of Companies for commencement of the business, for a direction to the
respondents not to grant recognition as a recognised stock exchange, for a
direction to respondents Nos. 14 and 15 to investigate exhibit P-2 complaint
and to ensure that no trading in securities is done on the floor of the first
respondent, and also for a direction to respondents Nos. 11 to 18 to prosecute
the offenders.
The
first respondent is, admittedly, a company registered under the Companies Act.
Under section 12 of the Companies Act, any seven or more persons, or where the
company to be formed will be a private company, any two or more persons,
associated for any lawful purpose may, by subscribing their names to a
memorandum of association and otherwise complying with the requirements of the
Companies Act for registration, form an incorporated company, with or without
liability. Once the requirements under the Companies Act are satisfied, the
Registrar of Companies will have to register the company. The requirements for
registration of companies are laid down in section 33 of the Companies Act and
if the Registrar is satisfied that all the requirements have been satisfied, he
has to register the company. That is how the first respondent-company was
registered on October 12, 1990. After the registration of the company, it
cannot do any business without a commencement certificate under section 149 of
the Act. Even borrowings by the company can be done only after the issue of
such certificate. Under section 13 of the Act, the memorandum of every company
has to state, in the case of companies formed after the commencement of the Companies
(Amendment) Act, 1965, the main objects of the company to be pursued by the
company on its incorporation and objects incidental or ancillary to the
attainment of the main objects. The main object of the company is stated to be
to run a stock exchange business. For that purpose, the first respondent has to
apply for and obtain recognition from the Government of India to function as a
recognised stock exchange within the meaning of the Securities Contracts
(Regulation) Act, 1956 (for short "the Securities Act"). It is stated
that the company, after incorporation and after obtaining the commencement
certificate, applied for recognition under the Securities Act on November 8,
1990, and that application is still pending. It is submitted that the first respondent-company
has not been granted recognition as a recognised stock exchange yet. Therefore,
the position now is that the first respondent is purely a public limited
company. It is not a Government company in which more than 51 per cent. of the
shares are held by the Government. It is also not a public authority now.
Therefore, a writ will not lie against the first respondent. A writ cannot be
issued to cancel the registration of the first respondent-company or the
commencement certificate issued to it under section 149 of the Companies Act.
If the company is recognised as a recognised stock exchange, perhaps, to
enforce a public duty or to prevent abuse of the powers vested in the first
respondent under the Securities Act by virtue of the recognition, a writ may be
issued. As it is, the company is only formed by private individuals with
intention to do business as a stock exchange. It is not better than any other
public limited company in the country. The fact that it is proposing to carry
on certain transactions in which the public are involved will not make it a
statutory or other authority against which a writ would lie. Unless recognition
is granted under the Securities Act, it cannot be stated that it has a
statutory power or that a public duty is involved to make it amenable to writ
jurisdiction.
If
the first respondent-company is doing illegal activities, it is for the
petitioner to seek remedies available to him under the civil and criminal laws
of the land to prevent the same. In fact, the petitioner has approached
respondents Nos. 14 and 15 by way of exhibit P-2 complaint to investigate the
matter, to seize the documents and also to prevent illegal trading. The
Government Pleader appearing on behalf of the respondents submitted that the
complaint is being investigated.
Counsel
for the petitioner referred to the decision of the Supreme Court in Shri Anadi Mukta Sadguru S.V.V.S.J.M.S. Trust v. V.R.
Rudani, AIR 1989 SC
1607, to contend that a writ would lie even against a private individual if the
private individual is vested with a public duty. It is also submitted that a
writ has been issued against managers of aided schools on the ground that the
schools are financed and teachers are paid from the public fund. When public
duty is involved, then to enforce such a duty, writ will lie. But in this case,
the first respondent is only a registered company. To enforce the duties and
liabilities under the Companies Act, there are adequate provisions in that Act.
Public duty will stem only after recognition is given under the Securities Act.
Such recognition has not been given yet. The recognition may or may not be
given. The authorities which grant recognition are respondents Nos. 11 to 13.
The petitioner's case is that, in view of the fact that there is already a
stock exchange functioning at Ernakulam, there is no need to have another stock
exchange at Trivandrum, and that the persons who operate behind the so-called
stock exchange proposed at Trivandrum are not persons suitable to conduct such
business. These are matters to be taken before the authorities concerned, viz.,
respondents Nos. 11 to 13, so that they will be equipped with all information
required.
The
petitioner has also a case in support of which he has also produced news items
which appeared in newspapers, that members of the first respondent have already
commenced stock exchange business. If any business is done without obtaining
recognition and in violation of the Securities Act, there are penalties
provided under the Act including prosecuting the company. Section 19 of the
Securities Act clearly provides that no person shall, except with the
permission of the Central Government, organise or assist in organising or be a
member of any stock exchange (other than a recognised stock exchange) for the
purpose of assisting in entering into or performing any contracts in
securities. If there is any violation of this provision, it is for the
petitioner to approach the authorities concerned to prosecute the first
respondent. The petitioner can also inform respondents Nos. 11 to 13 about such
violation, for taking appropriate action. It may be an additional ground to
point out that the persons who are trying to organise the stock exchange are
violating the law even before recognition is granted. These are matters to be
taken before respondents Nos. 11 to 13 by the petitioner.
I
find no merit in this writ petition and it is, accordingly, dismissed.
[1931] 1 COMP CAS
199 (BOM.)
HIGH
COURT OF BOMBAY
v.
Mahomed Hayat
PATKAR AND BAKER,
JJ.
Letters
patent appeal no. 35 of 1929
AUGUST 29, 1930
R.A. Jahagirdar, for the appellant.
H.B. Gumaste, for the respondent.
Patkar, J.—This was a suit brought by the plaintiff for a declaration that he was the owner of the ten shares in the defendant bank. The defence was that the shares belonged to the deceased son of the plaintiff and the bank had a charge on the shares for the debts of the deceased.
The learned Subordinate Judge held that the plaintiff proved that the shares in question belonged to him. On appeal the case was remanded and the learned Subordinate Judge on remand held that the shares in suit did not belong to the plaintiff and that the name of the son was not entered benami for the plaintiff as alleged, and therefore, dismissed the plaintiff's suit.
On appeal, the learned District Judge held that there was no presumption of any intended advancement in favour of the son, and that the evidence adduced on behalf of the defendant was so slender and meagre that he would not be justified in holding that the defendant discharged the burden. He, therefore, set aside the decree of the lower Court and granted the declaration sought for. The second appeal was dismissed, and against the order summarily dismissing the appeal the defendant has filed this appeal.
It is first urged on behalf of the appellant that the purchase by the father was in contravention of rule 12 of the Government Servants' Conduct Rules, and, therefore, the purchase made by the plaintiff was void on the ground of public policy under s. 23 of the Indian Contract Act. Rule 12 runs as follows:—
"A Government servant may not make any investment, other than an investment in immovable property permitted by rule 10, which gives him such private interest in matters with which his public duties are connected as would be likely in the opinion of the local Government to embarrass or influence him in the discharge of his duties."
In the rule in question there is no absolute prohibition to make an investment other than an investment in immovable property permitted by rule 10, unless such investment was inconsistent with the duties of the Government servant. In the present case there is no evidence to show the position occupied by the present plaintiff, and it does not appear that the investment in the shares of the bank would have been inconsistent with his duties. According to the decision in Janson v. Driefontein Consolidated Mines, Limited, public policy is not a safe or trustworthy ground for legal decision, and it must be considered in every case whether the transaction in its inception amounted to or involved an illegality or was of such a nature that if permitted it would defeat the provisions of the law: see Govind v. Pacheco. The question was considered by this Court in Ramkrishna Trimbak v. Narayan, where it was held the Government Servants' Conduct Rule is not based upon any statutory prohibition, but is, as it is expressed to be, merely a rule of conduct. I agree with the view taken in the case of Manuel S. Lobo v. Nicholas Brilto, where it was held that the acquisition of property by a Government servant in the name of another, in direct contravention of departmental rules, is not illegal, and that such Government servant if he is in possession of the property so acquired, is entitled to maintain a suit for declaration of his title as against the person in whose name it was acquired, and if not in possession, is entitled to maintain a suit for possession. To the same effect is the decision in the case of Bhagwan Devi v. Murari Lal overruling the previous decision of that Court in Shiam Lal v. Chhaki Lal and Sheo Narain v. Mata Prasad. Walsh J. emphasized the necessity to distinguish between the conduct of a person and the subject-matter of the contract. Though the conduct of a person might be opposed to public policy, the subject-matter of the contract is not necessarily opposed to public policy, in the absence of any statutory prohibition. The same view was taken in Kamala Devi v. Gur Dayal. The decision in the case of Abdul Rahman v. Ghulam Muhammad is not necessarily inconsistent with this view and is based on the ground that a patwari is absolutely prohibited by a statutory rule from acquiring land in his own circle. We think, therefore, that the purchase of the shares by the present plaintiff is not illegal and opposed to public policy under s. 23 of the Indian Contract Act.
The next question is whether the shares belong to the present plaintiff or there was an advancement in favour of the deceased son of the plaintiff. According to the decision of the Privy in Council Kerwick v. Kerwick and Guran Ditta v. Ram Ditta, the general principle of equity applicable is that in the case of a voluntary conveyance of property by a grantor, without any declaration of trust, there is a resulting trust in favour of the grantor, unless it can be proved that an actual gift was intended, and though the law in England is somewhat different, in India there is no presumption of an intended advancement in favour of wife or child. The learned Assistant Judge on consideration of the whole evidence came to the conclusion that the evidence adduced on behalf of the defendant was so meagre that he would not be justified in holding that the defendant had discharged the onus. The learned Assistant Judge has not considered the fact that from 1914 till the death of the son on November 30, 1922, the dividends were paid to the son and not to the father. That would merely indicate an acquiescence by the present plaintiff in the payment of the dividends to the son, but unless his suit was beyond time the acquiescence would not deprive the plaintiff of the right to which he is entitled. We think, therefore, that the finding of the lower Court that there was no advancement intended by the father in favour of the son, based on the evidence in the case, must be accepted in second appeal.
The third question is whether the present
plaintiff's suit is barred by limitation. It is urged on behalf of the
appellant that the suit is barred by limitation under article 120 on the ground
that from 1914 the dividends were paid to the son. But it appears clear from
the evidence that the plaintiff was contending from the very beginning that the
shares did not exclusively belong to the son and that his name should be
entered along with the son and it was only on June 6, 1918, that the defendant
rejected the request of the plaintiff. The Bank advanced money to the son on
the security of the shares after the plaintiff gave notice to the bank not to
pay dividends to the son on the ground that the transaction was benami. The
learned Subordinate Judge, therefore, held that the plaintiff's claim was not
barred by limitation as the suit was brought within six years when his claim
was denied by the defendant. The lower appellate Court was not invited to go
into the question of limitation when the case was argued before it, but during
the course of the judgment the learned Judge observed that the bank on June 6,
1918, rejected the request by Exhibit 57, Taking that as the starting point of
limitation, we think that the plaintiff's claim is not beyond time.
It is not necessary to deal with the point based on ss. 29 and 33 of the Indian Companies Act which was not taken in any of the lower Courts nor in the memorandum of appeal, but though the bank could not recognise a trust in respect of the shares or was not bound to recognise such a trust, it would not prevent the Court from considering the rights between the parties and the propriety of the dealing by the defendant after the notice given by the plaintiff—See Halsbury's Laws of England, Vol. V, p. 151, note (c) and Mackereth v. Wigan Coal and Iron Company Limited .
We think, therefore, that, on the whole, the view taken by the lower Court is right and this appeal must be dismissed with costs.
Baker, J.—The argument that the plaintiff, being a Government servant, could not purchase the shares in his own name is really an admission that the purchase money proceeded from the plaintiff, and his son at the time was a minor who could have had no money of his own.
This being so, the next question that arises is whether this purchase was by way of a benami purchase or whether it was by way of an advancement to the son. In this connection the learned Assistant Judge has referred to the leading case of the Privy Council, Kerwick v. Kerwick (supra p. 202) and there is a similar case, Guran Ditta v. Ram Ditta (supra p. 202), from which it will appear that the doctrine of advancement would not apply in India. The question mainly arising is, the shares being the property of the plaintiff, whether there is anything in the circumstances of this case which would prevent his recovering the property from the bank. So far as the argument is based on the Government Servants' Conduct Rules, it may be pointed out that rule 12 does not constitute an absolute prohibition but merely prohibits an investment other than an investment in immovable property which gives him such private interest in matters with which his public duties are connected as would be likely in the opinion of the Local Government to embarrass or influence him in the discharge of his duties. This is only a rule for Government servants' conduct and would not affect transactions between a Government servant and a private party, as has been held in Ramkrishna Trimbak v. Narayan (supra p. 201), and by the Madras High Court in Manuel S. Lobo v. Nicholas Britto (supra p. 201).
There is no evidence, as a matter of fact, on the record of this case to show what position the plaintiff, who is now a pensioner, occupied, and supposing that he was a clerk in the post office or a teacher in a school, the holding of shares in a local bank would not possibly give him such private interest in matters connected with his public duties as would embarrass or influence him in the discharge of those duties. In view of the rulings to which I have referred, there can be no question of rule 12 rendering the transaction with the bank void.
The only remaining question is one of limitation. That has not been expressly dealt with by the lower Appellate Court, though it is dealt with by the first Court. The suit is governed by article 120, being a suit for a declaration that the shares are the property of the plaintiff and not of his son. The period from which limitation under article 120 is to be reckoned is, of course, in view of the nature of the article, the date when the right to sue accrued. The first Court in dealing with this matter has held that the right to sue accrued when the bank refused to grant the plaintiff's request to enter his name in the register of shareholders on June 6, 1918. It has now been argued that the receipt of the dividends by the son for eight years up to his death in 1922 would furnish a starting point of limitation. That point also does not seem to have been made in the Courts below. The learned Judge of the Appellate Court has referred on page 2 to the bank's refusal by Exhibit 57 to issue a consolidated certificate for the shares in dispute and for twenty-two other shares purchased by the plaintiff in May 1918. The rejection was on June 6, 1918. It was only after the plaintiff served the bank with a notice calling upon the bank not to pay the dividends to the son and telling them that the transaction was benami and that he was going to file a suit for such a declaration, that the bank advanced money to the son on the joint security of the shares and of one of his clerks, and even before us it has been admitted on behalf of the appellant that the question of estoppel does not arise. Otherwise, there would have been the question of estoppel inasmuch as the shares were bought by the plaintiff in the name of the son. In these circumstances, I think that the right to sue must be taken to have accrued at the time when the bank, in June 1918, definitely refused to enter the name of the plaintiff as the shareholder in respect of these shares along with the other shares purchased by him, and this being so, the suit is not barred by limitation.
At the fag end of the case, in reply, the warned advocate for the appellant has raised the question under ss. 29 and 33 Companies Act as to the bank not recognising any trust. There is no evidence on the record, bat ^ assume that the bank is registered under the Indian Companies Act, and, therefore, under ss. 29 and 33 of the Indian Companies Act the bank is not obliged to recognise a trust, but, that would not prevent the Court from recognising a trust in a suit in which evidence of the trust is forthcoming, and that is done by the Chancery Court in England. I may refer to the case of Binney v. The Ince Hall Coal and Cannel Company and also to the case of Bank of N.T. Butterfield & Son, Ltd. v. Golinsky. I find these cases in Dr. Khergamvala's Indian Companies Act, 2nd Edition, p. 48. In these circumstances, I think there is no reason why the plaintiff should not be considered to be the owner of the shares and should not be given the declaration which he seeks.
I am of opinion, therefore, that this appeal should be dismissed with costs.
v.
MUKHARJI, J.
SUIT NO. 901 OF 1954
APRIL 1, 1954
S.M. Bose, Advocate-General, H.N. Sanyal and A.K. Sen, for the Applicant.
S. Chaudhuri and P. Ginwallah, for the Respondents.
Mukharji, J.—This is an application by the plaintiff for an injunction to restrain the first defendant, Fort Gloster Jute Manufacturing Company Limited, from acting upon and communicating to the Central Government the resolutions purported to have been passed in the meeting of the defendant company, Fort Gloster Jute Manufacturing Company Limited, held on March 16, 1954.
The tussle is over the managing agency of this company. The main issue in this controversy relates to the transfer by sale of the total interest of ordinary shareholders in Kettlewell Bullen & Co. Ltd., the present managing agents, Messrs. Mugneeram Bangur & Co. to Kettlewell Bullen & Co. Ltd. has been the managing agent of the defendant company for a long time. Some share holders are in favour of such sale of the shares of Kettlewell Bullen & Co. Ltd. and others against it. There are allegations that they are being sold at a fabulous price which allegations are denied. Rivalry between Lala Lakshmipat Singhania and Messrs. Mugneeram Bangur & Co. is alleged to be the main motive of these proceedings.
At the moment the present controversy relates to a meeting of the shareholders where it was decided that such transfer should be made. The actual resolution before the company was:
"That the proposed sale of the 100 percent. interest of the ordinary shareholders in Kettlewell Bullon & Co. Ltd, the managing agents of the company to Messrs. Mugneeram Bangur & Co., of 7, Lyons Range, Calcutta, be and is hereby approved and that the directors be and are hereby authorised to notify the managing agents of this company's approval of such sale."
At the meeting of March 16, 1954, the chairman declared the resolution passed with 1,164 votes for and 313 votes against. The voting was not by a show of hands but by a poll.
The suit filed by the plaintiff challenges this result of the meeting. Its main ground for the challenge is that the chairman of the company and directors of the company in collusion with the scrutineers fraudulently rejected certain proxies, a list of which is set out in paragraph 18 of the petition. It is the case of the plaintiff that such rejection was improper and illegal. The main point of submission on the allegation of improper and illegal rejection of proxies is not concerned, however, with any alleged fraud or conspiracy, and the learned Advocate-General appearing for the plaintiff applicant rightly conceded before me that he was not pressing the question of fraud or conspiracy at this stage of the interlocutory application. Obviously that was the correct approach because no question of fraud and conspiracy can be tried on mere affidavits on an application. The learned Advocate-General contended that he was putting his client's case only on a point of law. The point of law on which he says the rejection of the proxies was illegal must therefore be, briefly, set forth.
The Allahabad Bank Nominees Ltd. and the Bank of India Ltd. were the holders of 256 shares and 1,735 shares respectively. In respect of their holdings the Allahabad Bank Nominees Ltd. gave two proxies, one to the applicant for 50 and the other to the directors of the company for 206, and the Bank of India gave two proxies, one to the applicant for 85 and another to the directors of the company for 1,650 ordinary shares and 61 preference shares. It is the applicant's case that the votes of a shareholder could not be split up in that manner and all should have been rejected but notwithstanding the same the chairman wrongfully and illegally rejected the proxy given by the Bank of India Ltd. in favour of the applicant and wrongly accepted those in favour of the resolution. The chairman also, it is contended, wrongly accepted all the votes cast under the two proxies given by the Allahabad Bank Nominees Ltd. On behalf of the company it is stated that the Allahabad Bank Nominees Ltd is the holder of 196 shares and gave proxies in respect of 30 shares to the applicant and in respect of 165 shares to Geoffrey John Gardner, a director of the company, and himself, a defendant in this suit. It is also said on behalf of the defendants that the Bank of India Ltd. is the holder of 1,541 shares and gave a proxy in respect of 95 shares to the applicant which, according to the company, was lodged too late and proxies in respect of 1,292 ordinary shares and 61 first preference shares to the same Geoffrey Gardner.
It is contended on this issue by the company that shares registered in the names of the banks and their nominees are in the majority of cases shares that belong to the constituents of such banks, and in respect of such shares the banks are trustees and are bound to vote as their respective constituents may direct. It is also said that it is the usual practice for banks to issue different proxies in respect of different parcels of shares.
It has also been shown on a calculation (which appears as Annexure F to Gardner's affidavit) that even if the opponents of the resolution had been allowed to vote in respect of the disputed 445 shares in respect of which registration was refused and even if all the proxies lodged in time which are alleged to have been improperly rejected were counted and corresponding deductions were made from the total of votes cast in favour of the resolution, the said resolution would still have been passed with a majority. The Advocate-General contends that Annexure F shows a perilous majority of one, and if his contention is accepted this majority of one will be wiped off.
This particular point of splitting the proxy has to be decided as a point of law.
In an interlocutory application there must be a prima facie cast both on facts and law which should justify the grant of an interim injunction restraining company management. That prima facie case should all the more be clearly made in the case where attempt is made to restrain the normal function of a company according to the decisions of the domestic forum of the company. Bearing these principles in mind, I now propose to discuss the prima facie case on law and on facts.
By Article 90 of the articles of association of the Fort Gloster Jute Manufacturing Company Limited it is provided: "In case of any dispute as to the admission or rejection of any vote, the chairman shall determine the same and such determination made in good faith shall be final and conclusive." Prima facie, therefore, unless a case of bad faith is made, I consider it to be the normal course of the court to allow the decision of the chairman to stand as prima facie final until it can be found to be wrong at the trial and decision in the suit. If that principle is once accepted, then there is no scope here in this case for grant of an interlocutory injunction on the ground that the chairman has wrongly rejected certain votes given by proxy or wrongly accepted such votes.
The principle is fairly well settled on this point. In In re Indian Zoedone Company, the Lord Chancellor Selbobne observes at page 77:—
"The minutes in the books are to be received, not as conclusive, but as prima facie evidence of resolutions and proceedings at general meetings; and also it may be added, and I think correctly that the chairman, who presides at such meetings and has to receive the poll and declare its result, has prima facie authority to decide all emergent questions which necessarily require decision at the time, his decision of those questions will naturally govern, and properly govern the entry of the minute in the books; and, though in no sense conclusive, it throws the burden of proof upon the other side, who may say, contrary to the entry in the minute-book, following the decision of the chairman, that the result of the poll was different from that there recorded."
That represents the main principle which should guide these courts in granting an interlocutory injunction in these matters. In fact, Lord Justice Cotton in the same case observed at page 81 as follows:
"The appellants seem to consider that it was for the respondents to justify and support the chairman's decision. In my opinion that is their fallacy; it is for them to satisfy us that that decision was wrong not for those who rely upon that decision to bring evidence to show that in fact it was right."
The principle is also emphasised in a more recent decision in Wall v. Exchange Investment Corporation Limited. There an article of association provided that no objection should be made to the validity of any vote except at the meeting at which it was tendered, and that every vote, whether given in person or by proxy, not disallowed at any meeting should be deemed valid for all purposes. It was held, affirming Romer J., that the decision of the chairman, who, in the bona fide exercise of the power conferred upon him by the article, had refused to disallow a vote by proxy to which objection had been taken at the meeting, was final and would not be reviewed by the court. Pollock M. R., at page 145, delivering judgment observed:—
"If the chairman's discretion or powers are to be wide enough for him to determine the matter, and he does not disallow the votes, they are to stand and to be valid for all purposes whatsoever."
The Master of the Rolls discusses different situations which it is needless for me to quote. I cannot improve on what has been said by Sargant L.J., who was one of the members of the Court of Appeal deciding that case along with Pollock M.R., at page 148, and this is what Lord Justice Sargant says:—
"It is obviously desirable that questions of this sort should be determined in a summary way and without the necessity of coming to the courts. Mr. Swords says that, according to the terms of this article if the chairman had disallowed a vote his decision is not conclusive. It may well be that in the case where a vote has been disallowed, the shareholder whose right has been impeached to that extent should have a right to apply to the courts. Here all that is done is to take away from a shareholder a right of appeal against a decision disallowing an objection by him against the votes of some other shareholder, and it seems to me quite reasonable that such a question should be allowed to be decided summarily and finally by the chairman, although there should not be the same summary and final effect given to a decision against the right of a shareholder to vote."
I have only cited these cases to show the general principle in the matter of voting at company meetings and which can be taken as a guide for granting interlocutory injunctions against companies in course of their management.
Here the article that I have quoted is very much wider than the article which was considered by Lord Justice Sargant in the case of Wall v. Exchange Investment Corporation Limited. I am not concerned at present with the ultimate scope, effect and validity of this provision in the articles of association in excluding, if it does, the review by courts. What is being emphasised is that prima facie it is the company's articles which have said that the chairman's decision, if in good faith, shall be final and conclusive. Whether it succeeds in completely excluding the courts from reviewing such decision in any case is not a matter which I am called upon to decide on this application and I do not do so. But it is quite clear that from the point of view of a prima facie case, the chairman's decision should prima facie be allowed to stand before the suit is heard and a decision is given at the trial.
The results of my review of the authorities on this point show that the courts have evolved certain well-defined principles which regulate company meetings. Primarily the articles of association and the company statute provide the matrix of the company law on the point. Secondly, the courts are generally reluctant to interfere with the decisions taken at company meetings, unless there is almost a manifest breach of the articles or the statute, because it is the company and not the court which is responsible for its management. The court is hardly a substitute for the company in this respect except in specified cases provided by statute and these again are mostly cases where the company itself finds it difficult to manage its own affairs as in liquidation or schemes or where in public interest the court has to interfere or sanction as in cases of fraud by the majority on the minority or cases of amalgamation or reduction. This is the rule of domestic forum applied to company jurisprudence. The third principle which the courts have evolved as a corollary of the first two principles is that prima facie the decision of the chairman at such company meetings is allowed to stand until it is proved to be in breach of the articles or the statute. The burden of proving the chairman's decision to be wrong rests with the party challenging his decision and it is not for those who rely on his decision to bring evidence in the first instance to show that the chairman was right. This is the rule of convenience and of practical wisdom. It is of great practical utility. The chairman, by virtue of his position and the nature of his duties, has to decide on the spot all emergent questions that arise at the meeting and it will be mere folly to reduce the prima facie authority of his verdict. The burden of holding and conducting conducting meetings and recording votes cast therein and for taking decisions at such meetings is the primary responsibility of the company's shareholders and their chosen directors and not of this court.
The learned Advocate-General realised that unless he could show prima facie that some of these proxies which were accepted or rejected were cases of obvious or prima facie illegal rejection or reception of votes, he could not sustain his application for interlocutory injunction. By consent of Mr. Choudhury, the learned counsel appearing for the company, and the learned Advocate-General for the plaintiff, it was decided to scrutinise the disputed proxies which were brought into this court to enable the learned Advocate-General to prove his prima facie case. The learned Advocate-General selected two classes of proxies—one of Sourashtra and the other of Central Bank of India Ltd., and said that he would satisfy me that prima facie his client's case should be accepted. I roust record here that on examination it was found that there was no prima facie case against the defendants on these two proxies. The prima facie case of the plaintiff therefore fails on this aspect of the case.
I am therefore satisfied on the basis of these principles, that the prima facie case on facts in this case is against the applicant and that justifies the refusal of this court to grant an interlocutory injunction.
Then comes the prima facie question of law. As I have already indicated, the main challenge is that the shareholder holding a number of votes cannot split his votes and give a few to one proxy and others to another proxy.
The basis of the argument is the plausible one that a shareholder being one person, whether a company or a corporation, cannot be expected to say "yes" and "no" on the same resolution. The answer that is given is that each share carries the right to vote, and, therefore, logically and legally every share has a voice to be heard and there is nothing in law which prevents such voice being exercised in any way as the holder chooses to do. He may say "yes" and "no" in the same resolution and make himself foolish or he may say that he has not been able to come to a Decision one way or the other and so distribute his votes equally to maintain the balance by distributing his votes equally on either side. Nor is it unknown in company meetings or other meetings for the chairman to have a casting vote in addition to the one he has as a member and there is nothing in the rule of law or practice which prevents the chairman from using his original vote for, and his casting vote against, the resolution. The learned Advocate-General, who appears for the plaintiff in this case, then proceeds to contend that this view cannot be supported because it is inapplicable in a case where there is voting by show of hands. A man can only show his hands once and having done so, his power is exhausted although he may be holding proxies for numerous other persons. The analogy of voting by show of hands is misleading and its fallacy requires to be demonstrated because the plausibility of that argument appears very convincing at the first blush. The learned Advocate-General has backed up his argument by reference to the new amendment in the English company law which is now Section 138 of the English Companies Act of 1948 which says: "On a poll taken at the meeting of a company or meeting of any class of members of a company, the member entitled to more than one vote, need not, if he votes, use all his votes or cast all his votes he uses in the same way."
From this the learned Advocate-General concludes that this was necessary because it could not be done without an Act of Parliament. He backs it up by drawing my attention to paragraph 77 of the Indian Company Law Committee Report where the same proposal has been made with further improvement by including even the proxies. I will presently show from an extract from the Report of the Committee presided over by Mr. Justice Cohen in England which was the precursor of the amended English Companies Act on this point, that the learned Advocate-General's hypothesis is wrong.
I have carefully gone through the authorities on this branch of the law and I am satisfied that the learned Advocate-General's contention is not sound and cannot be accepted. The main reason for not accepting his argument is first, that the analogy that proxies cannot be counted on a show of hands and therefore should be rejected is a defective analogy. The main reason to describe the analogy as defective is that by a long series of cases and judicial pronouncements in England it has been clearly laid down that proxies cannot be used on a show of hands but they can be used on a poll. The second reason for rejecting the Advocate-General's contention is that it is not correct from the point of view of legal history, when he said that without an Act of Parliament this splitting of votes could not be done. I find from the history of precedents and review of authorities in England that it was done and at least attempted to be done more than once and there was serious conflict of judicial opinion on the point whether it could be done or not. The reason, therefore, of an Act of Parliament was to clarify the law and to set all this conflict at rest. It is abundantly made clear by a reference to paragraph 135 of the Cohen Committee's Report on English company law amendment where it is recorded: ''When a nominee holds shares in a company on behalf of more than one beneficial owner, he normally consults the persons on whose behalf be holds the shares before voting on any resolution before the shareholders. The beneficial owners of the shares may have divergent views on the proposals put before them. Some will instruct the nominee to vote for the proposals, some will instruct him to vote against. Nominees usually carry out these instructions. It is however doubtful whether it is legal for a shareholder to use some of his voting power in support of a resolution and some of it against the same resolution, though in practice, it is obviously desirable that a nominee should express as faithfully as possible the views of the persons on whose behalf he acts. We accordingly suggest that it should expressly be laid down that a shareholder may, if he wishes, either in completing a proxy form or in voting himself on a poll at a meeting, direct that some of his votes shall be cast for the resolution and some against or use only a part of the votes to which he is entitled."
I propose to indicate the landmarks in the case law on the point in order to show that the prima facie case in law even is against the contention of the plaintiff.
The first decision is In re Horbury Bridge Coal, Iron and Waggon Company decided in the year 1879. In that case Bacon V.C. held that the proper mode of voting was by heads or by shares and he was of the view that even on a show of hands the shares had to be counted and that even in a case where no poll was demanded. The decision of Bacon V.C. was upset in the Court of Appeal by Jessel M.R. sitting with Bramwell L.J. and Brett L. J. Jessel M. R. at page 115 of that report observes: —
"We will first of all consider what may be termed the common law of the country as to voting at meetings. It is undoubted, and it was admitted by Sir Henry Jackson in his argument for the respondents, that, according to such common law, votes at all meetings are taken by show of hands. Of course, it may not always be a satisfactory mode—persons attending in large numbers may be small shareholders, and persons attending in small numbers may be large shareholders, and, therefore, in companies provision is made for taking a poll, and when a poll is taken the votes are to be counted according to the number of shares, in some cases according to the number of shares absolutely, as in this company, viz., a vote for every share, while in other companies there is another scale, and the number of votes increases, but not so rapidly as the number of shares, and there is a. limit to the number of votes which a single shareholder can have."
The Court of Appeal came to the conclusion in that case that proxies were to be counted on a show of hands.
Chronologically the next case of importance is Bidwell Brothers, In re. It represents an interesting and important episode on the evolution of this branch of the company law. It came in the year 1893-There Vaughan Williams J. observes at page 607:—
"I have come to
the conclusion that the votes of the members who were present only by proxy
ought to be taken into consideration even though no poll was demanded."
The learned Judge also expressed the view at page 608: —
''It is said the votes of those persons can be counted, and will be counted, when a poll is demanded, and that it is intended that their voice shall be heard on that occasion only. It seems to me that a decision to that effect would create great injustice to the members present at a meeting by proxy only, because, according to the decision in R. v. Government Stock Investment Company the proxies do not seem able to demand a poll. I think that, under these circumstances, I ought to hold that the chairman of this company was right in counting the votes of the members who were present by proxy. The votes of those persons must be counted as the votes of persons actually present, not according to the number of shares they hold, but each person present by proxy must vote as one person and one person only, and the chairman must ascertain the way in which he wishes to vote from his proxy."
This case was not followed by Chitty J. in the year 1896 in Ernest v. Loma Gold Mines Limited. There Chitty J. came to the conclusion that at a meeting of the shareholders of a company convened for the purpose of a special resolution, though the regulations of the company provide that votes may be given personally or by proxy, a member present only by proxy has no right to vote upon a show of hands. Chitty J. disapproved of the decision in Bidwell Brothers In re. Most of the arguments of Chitiy J. from page 578 to 580 is concerned with showing the practical inconvenience of counting proxies on a show of hands. But the learned Judge does say at page 579-80: "The proxies come in when the poll is demanded."
Then in the year 1807 the view of Chitty J. in the above case was upheld in appeal, overruling finally the decision in Bidwell Brothers In re. The real basis of that decision was that it was against the nature of a show of hands that one hand should count for more than another and a man who holds up his hand holds it up in respect of all his voting power. The decision in appeal was rendered by Lindley L.J. sitting with A. L. Smith L.J.
The review of those authorities shows that certainly from 1879 until 1897 there was great divergence of judicial opinion. This fact alone indicates that it cannot be suggested that the new Section 138 in the English Companies Act was only introduced to create a new statutory right which was never recognised before.
From these authorities two propositions emerge quite clearly. First, that while there was at common law no right of voting by proxy it has come in by way of special company regulations and company statutes. It was never questioned that proxies must be counted at a poll though not by a show of hands and, therefore, the Advocate-General's argument of reducing votes by poll to the same level as votes by show of hands is unsound. The next proposition then is that if the proxies are to be counted at a poll, and I need only repeat here that in the case before me it is not a case of show of hands but of poll, then how are the proxies to be counted? In this case, for instance, the Allahabad Bank Nominees Ltd. and the Bank of India Ltd. held a number of shares for which they appointed simultaneously two proxies, each with a number of shares. The shares in this case with which I am concerned carry the right to vote attached to each share. All authorities are clear on the point that proxies have the right to vote. Now, if each share has a vote, then the fact that one person happens to hold a number of shares and, therefore, a number of votes, cannot preclude the operation of the separate voting right attached to each share.
In a sense it is remarkable how this argument has been developed. It is accepted without demur that X holding some forty shares with a vote for each share will have forty votes and he can exercise all these forty votes on one side. Yet it is the argument that while all the votes can be used on one side they cannot be used one against the other, because it is said to be against common sense that a person should be allowed to vote both for and against the same resolution. Supposing a man wishes to do so, he may be whimsical or he can make himself a nuisance or he may genuinely be vacillating or he may genuinely think that his voting rights should be distributed in some proportion both for and against the same resolution. The central idea in solving this particular problem, apart from authorities, is to remember and consider that each share carries with it a right to vote. The fact that all the shares happen to be in the hands of one person does not merge the different voting rights and make them one. The plurality of votes cannot disappear because of the singularity of the person who holds these votes. It is settled in company law that the right to vote attached to a share is property and it will in ray judgment be a most wanton confiscation of property rights in respect of company shares which cannot be justified in law by the magic of one person holding many shares or by the innovation of a spurious doctrine of a newfangled merger. Those who advocate obliteration of the different voting rights in respect of different shares because of the fact that the relative shares happen to be held by one person do not seem to realize that such a holder may sell his different shares to different persons and if that is so these different voting rights will have to re-emerge because the persons holding them become different again. The fallacy of the view lies in the failure to realise that the holders of these shares may coalesce but neither the shares nor the the votes do. The right to vote, therefore, is to be judged not by the personality but by the share. If the shares are different, the votes can be different and the holder need not be precluded by any doctrine of convenience or inconvenience or propriety that he cannot vote both "yes" and "no" on the same resolution. As owner of the specific property in each specific share he can distribute his votes on the shares he holds in any manner he chooses. The way he votes cannot take away the legal right in each share carrying the right to vote.
There is one other point made by the company. It is not disputed that the Allahabad Bank Nominees Ltd. and the Bank of India held the shares on behalf of their individual constituents and it is only proper that holding their proxies they must vote according to the desires of their individual constituents although in paper these corporations are holders of the shares. The learned Advocate-General argued that to recognise that fact will mean that the company has to recognise trusts which of course the company cannot do. I am afraid this argument misconceives the whole doctrine of non-recognition of trust in company jurisprudence. What is said in Section 33 of the Indian Companies Act is that no notice of any trust, express or implied or constructive, shall be entered on the register or receivable by the registrar. Nothing of that kind is done by allowing the Allahabad Bank Nominees Ltd. and the Bank of India to vote according to the dictates of the constituents on whose behalf they hold the shares. Indeed to extend the doctrine of non-recognition of trust in the manner argued by the learned Advocate-General will be to destroy the whole principle of voting by proxy. I am therefore unable to uphold the Advocate-General's contention on this point.
On these grounds I am satisfied prima facie that there should be no interlocutory injunction, first, because prima facie article 90 is on the way, secondly, because the trend in law and in fact is against the applicant.
I,
therefore, dismiss this application with costs. I certify this motion for two
counsel.
[1981]
51 COMP. CAS. 375 (DELHI)
HIGH COURT OF DELHI
v.
Union of India
S.
RANGANATHAN AND D.R. KHANNA, JJ.
C.W.P. Nos. 665 and 787 of 1978.
FEBRUARY
27, 1980
G.L. Sanghi and C.L.
Chopra for the Petitioner.
B.N. Lokur, K.L. Sharma and
K.N. Kataria for the Respondent.
JUDGMENT
D.R. Khanna, J.—These two writ petitions bearing Nos. 665 and 787 of 1978,
raise certain common questions of fact and law and are, therefore, being taken
together.
Briefly stated, the
controversy pertains to whether the transfer of shares which a debtor, on
obtaining a loan from a bank, effects in the latter's favour in the course of
extending security results in the creation of a trust and, therefore,
necessitates the registration of trust with the Public Trustee in terms of s.
153B of the Companies Act.
Writ Petition No. 665 of
1978 has been brought by the New Bank of India Ltd. The respondents impleaded
are the Union of India and the Public Trustee to the Government of India,
Department of Company Affairs. It is averred that the petitioner-bank in the
normal course of its banking business is having a large number of cash credit
accounts against the security of shares, etc. One such account is being
maintained by the Universal Investment Private Ltd. from December 12, 1968, at
the bank's office in K-Block, Connaught Circus, New Delhi. The credit limit
permissible in this account is up to Rs. 4,50,000. That concern has, apart from
executing a pronote in favour of the bank for Rs. 4,50,000 as collateral
security, handed over to the bank 67,600 shares of Rs. 10 each held by it in
the Jaipur Udyog Ltd. and given blank transfer deeds as security towards the
payment of the amount. A further agreement for cash credit account was executed
by this concern on August 20, 1971, and the shares were pledged in favour of
the bank. In terms thereof the bank was given full authority either to sell the
shares or to get them transferred in its favour. The bank accordingly got those
shares transferred in its name. This was also in accordance with the general
practice of the bank when the amounts of loans exceeded Rs. 50,000.
It has further been averred
that on 3rd November, 1976, the petitioner-bank received a letter from the
Public Trustee requiring it to file a declaration (as per form enclosed) under
s. 153B of the Companies Act. The bank, however, did not do so and rather
contested the propriety of the notice on the ground that it was not a trustee
but a mere pledgee, holding the shares as security towards realisations of the
amount advanced which stood at over Rs. 7,90,000 on June 1, 1978. No instrument
of trust in writing whatsoever was said to have been executed and this
circumstance by itself, it was stated, excluded the application of s. 153B.
However, in spite of this clarification given to the Public Trustee as also the
clear provisions of law, the Public Trustee is insisting that the bank should
abide by the provisions of s. 153B. This writ petition has, therefore, been
filed seeking relief in the nature of a writ of certiorari and mandamus to the
effect that the respondents should not proceed against the bank for the alleged
contravention of the provisions of s. 153B of the Companies Act.
From the side of the
respondents, a counter has been filed by Shri M.K. Kukreja, Public Trustee. In
this, it has been stated that the transfer of the shares in favour of the bank
as collateral security for the cash credit account did not create any
beneficial interest in those shares in favour of the bank, and instead the same
continued to be retained by the Universal Investment Trust Ltd. In this way, a
trust was stated to have been created and the bank was estopped from disputing
its legal character. It has further been urged that it would be necessary and
proper to examine the true nature of the transaction, having regard to all the
terms and conditions of the various documents. It has been denied that the bank
is only a pledgee. Rather the ownership of the shares, it is pointed out, has
been transferred in favour of the bank while the beneficial interest is still
retained by the Universal Investment Trust Ltd., and thus a trust has come into
being. It has also been denied that no instrument in writing creating the trust
has been executed. The agreements and documents executed between the parties,
it is pleaded, constituted the instruments in writing.
In the other Writ Petition
No. 787 of 1978, the petitioner No. 1 is the Sutlej Cotton Mills Ltd.
(hereinafter called "the Sutlej Cotton") and the petitioner No. 2 is the
Gwalior Rayon Silk Manufacturing (Weaving) Company Ltd. (hereinafter called
"the Gwalior Rayon"). The respondents impleaded are the Union of
India, the Public Trustee and the Punjab National Bank, Bhawani Mandi. The
facts enumerated are that the Sutlej Cotton pledged and/or deposited 1,46,000
equity shares of Rs. 10 each which it held in Gwalior Rayon with the Punjab
National Bank, Bhawani Mandi, as collateral security, in consideration of the
bank agreeing to stand guarantee for the machinery purchased by Sutlej Cotton's
unit known as "Rajasthan Textile Mills" on deferred payment terms.
Those shares were subsequently got registered with the Gwalior Rayon in the
name of the bank during the period from February 24, 1975, to January 21, 1977.
By this pledging and/or deposit of shares, a mere charge was created over the
shares in favour of the bank which held them as a bailee for the specific
purpose. A resolution of the board of directors of the Sutlej Cotton was passed
on June 25, 1974, giving out the circumstances in which the shares were pledged
and certain letters were also exchanged with the bank. The entire transaction,
it has been claimed, in reality and in substance, amounted to a pledge and/or
pawning within the meaning of s. 172 and other provisions contained in the
Indian Contract Act.
It has further been stated
in the petition that the Public Trustee has required the Punjab National Bank
to file a declaration as trustee of those shares in terms of s. 153B of the
Companies Act. Similarly, the Gwalior Rayon has been required to send all
papers, notices, etc., concerning those shares to the Public Trustee. The
Sutlej Cotton then refuted that any such trust had been created and instead
pleaded that the bank's status was that of a pledgee. The notices were,
therefore, required to be withdrawn. The Public Trustee, however, insisted in
his designs and claimed to possess certain legal opinion from the Ministry of
Law. That legal opinion, however, was not made available to the petitioners.
It has, therefore, been
contended that the transaction between the Sutlej Cotton and the Punjab
National Bank was a contract of bailment simpliciter, whereunder shares had
been merely pledged and/or pawned as security, and no trust whatsoever had been
in any manner created. Sections 153B and 187B of the Companies Act are,
therefore, pleaded to be not applicable as they can be invoked only where a
trust within the meaning of s. 3 of the Indian Trusts Act, 1882, had been
created. A bailee, it is urged, cannot be termed as a trustee. The present writ
has, therefore, been moved alleging that in case the petitioners did not comply
with the demands of the Public Trustee, they were in all likelihood to suffer
irreparable harm in the form of penalties, etc. Relief in the nature of mandamus,
prohibition and certiorari has been sought.
From the side of the Public
Trustee, a counter has been filed in which similar assertions have been made as
already mentioned in the narration of facts of the other writ. The locus standi
of Sutlej Cotton to move this writ has also been challenged. Rather, the
notices and letters of the Public Trustee were stated to be all addressed to
Gwalior Rayon by the Punjab National Bank. It is reiterated that the bank has
become a trustee of the shares within the meaning of the expression under s.
153B of the Companies Act, particularly when the shares stand transferred in
its favour. Trusts, it is pleaded, are of various kinds and included
constructive trusts also. The expressions "trust" and "trustee"
appearing in s. 153B, it has been urged, are used in a general sense and not in
the technical sense given to them by s. 3 of the Indian Trusts Act. The
beneficial interest in those shares, it is pointed out, still vests in the
Sutlej Cotton.
Various documents have been
filed from the side of the petitioners. One of them dated April 3, 1974, is
addressed by the Punjab National Bank to the Rajasthan Textile Mills Unit of
the Sutlej Cotton in which it was intimated that the bank had extended deferred
payment guarantees for an amount of Rs. 36.50 lakhs. The securities required
from the Rajasthan Textile Mills were the counter-indemnity and the pledge of
shares of Gwalior Rayon to the extent of 125% of the guarantee amount. The
charge was to be got registered with the Registrar of Joint Stock Companies and
the shares also transferred in the name of the bank as per rules.
Another document shows that
the Punjab National Bank in compliance with the notice of the Public Trustee
submitted the required declaration under s. 153B of the Companies Act with the
Public Trustee in which it was mentioned that shares of the face value of 14.60
lakhs of the Gwalior Rayon were lying transferred to it as collateral security
against D.P.G. and term loan. The beneficiary was stated to be the Sutlej
Cotton. In a note written under this declaration it was, however, mentioned
that the shares were held as a pawnee and not as a trustee. Copies of documents
under which the shares were held were enclosed.
The copy of the resolution
dated June 25, 1974, of the board of directors of the Sutlej Cotton, about
which reference has been made above, stated that capital expenditure of Rs.
58,00,000, inter alia, for modernization of the company's textile mills at
Bhawani was to be incurred. Some of the machineries were also to be purchased
on deferred payment terms and for this purpose the company had approached the
Punjab National Bank for sanction of a deferred payment guarantee limit of Rs.
30.50 lakhs. The bank had agreed to the same. The pledging of all the shares
held by the company in the Gwalior Rayon with the bank was, therefore,
authorised to the extent of 125% of the guarantee amount as security.
Another document filed is a
circular issued by the Punjab National Bank, head office, to all its branches
in which reference has been made to a directive issued by the Reserve Bank of
India dated August 28, 1970, regarding advances against shares. It is enjoined
therein that where credit facilities of over Rs. 50,000 on the security of
shares are extended, the shares must be transferred in the name of the bank,
and the bank shall have exclusive voting rights in respect thereof. It contains
specific prohibition against the advance of credits. Where such voting rights
are not so transferred to the bank, those voting rights, it is further
provided, have to be exercised with the prior approval of the Reserve Bank of
India and in accordance with such directions as may be given by the Reserve
Bank of India.
In this case also, the
Sutlej Cotton executed a pronote in favour of the bank for an amount of Rs.
65,00,000. Another document dated January 12, 1973, brought out the terms and
conditions of the cash credit account (fresh) mentioning the overdraft facility
of Rs. 65,00,000. There is a narration in it of the deferred payment guarantee
and of the counter-indemnity from the company and the pledge of shares. In
another letter, the name of the company in which the shares were held, namely,
the Gwalior Rayon, was elaborated and an hypothecation agreement was also
executed on September 3, 1973. While forwarding the shares to the bank, the
Sutlej Cotton in its letter dated August 8, 1973, mentioned that they were
being sent as security for issuing the deferred payment guarantee. The bank,
however, informed in writing that the shares be transferred in its favour. This
was done accordingly.
During the course of the
hearing of this writ moved by the Sutlej Cotton and the Gwalior Rayon, it was
found that the Punjab National Bank had not made any appearance. The other
respondents, therefore, sought that the bank should be required to produce the
documents which the Sutlej Cotton might have executed while obtaining credit
and the transfer of shares. Directions were, therefore, issued to the bank to
file those documents. Some documents were thereafter filed along with an
affidavit to the effect that, apart from them, no other document existed in the
possession of the bank. It thus appears that no formal document was executed
between the bank and the Sutlej Cotton about the pledging of the shares.
Section 153B of the
Companies Act, 1956, under which the Public Trustee has required the two banks
to file declarations, is to the following effect:
"153B. (1) Notwithstanding anything
contained in section 153, where any shares in, or debentures of, a company are
held in trust by any person (hereinafter referred to as the trustee), the
trustee shall, within such time and in such form as may be prescribed, make a
declaration to the public trustee.
(2) A copy of the declaration made under
sub-section (1) shall be sent by the trustee to the company concerned, within
twenty-one days, after the declaration has been sent to the Public Trustee.
(3) (a) If a trustee fails
to make a declaration as required by this section, he shall be punishable with
fine which may extend to five thousand rupees and in the case of a continuing
failure, with a further fine which may extend to one hundred rupees for every
day during which the failure continues.
(b) If a trustee
makes in a declaration aforesaid any statement which is false and which he
knows or believes to be false or does not believe to be true, he shall be
punishable with imprisonment for a term which may extend to two years and also
with fine.
(4) The provisions of this section and section
187B shall not apply in relation to a trust—
(a) where the trust
is not created by an instrument in writting;
(b) even if the trust
is created by an instrument in writing, where the value of the shares in, or
debentures of, a company, held in trust—
(i) does not
exceed one lakh of rupees; or
(ii) exceeds one
lakh of rupees but does not exceed either five lakhs of rupees or twenty-five
per cent. of the paid-up share capital of the company, whichever is less.
Explanation.—The expression 'the value of the shares
in, or debentures of, a company' in clause (b) means,—
(i) in the case of
shares or debentures acquired by way of allotment or transfer for
consideration, the cost of acquisition thereof, and
(ii) in any other case,
the paid-up value of the shares or debentures".
These provisions thus show
that the shares must be held in trust and that such trust must have been
created by an instrument in writing. Of course, the value of the shares must
exceed rupees one lakh. The consequence of the trustee not filing the
declaration invites penalty of Rs. 5,000 and in the case of continuing failure,
a further fine which may extend to Rs. 100 for every day's default.
Section 187B further
enjoins that the rights and powers (including the right to vote by proxy)
exercisable at any meeting of the company, etc., cease to vest in the trustee
but become exercisable by the Public Trustee. The latter is empowered to attend
the meetings and exercise these rights and powers himself or require the
trustee to do so under his directions. The Public Trustee, however, may abstain
from exercising these rights and powers, if in his opinion the object of the
trust or the interest of the beneficiaries of the trust are not likely to be
adversely affected by such abstention. The trustee on his part may advise the
Public Trustee but it is left to the latter's discretion to accept or reject
the same. The Public Trustee is also conferred the rights and powers to receive
and inspect all books and papers which a member is entitled to receive and
inspect.
Section 187C makes
provision for the filing of declarations with the companies concerned by the
holders of shares who do not hold the beneficial interest in such shares.
Similar requirement is enjoined on the holders of beneficial interests also. On
their failure to file such declarations without any reasonable excuse, they can
be burdened with a fine of Rs. 1,000 per day during which the failure
continues. Sub-section (6) of the same section is to the following effect:
"Any charge, promissory note or any other
collateral agreement, created, executed or entered into in relation to any
share, by the ostensible owner thereof, or any hypothecation by the ostensible
owner of any share, in respect of which a declaration is required to be made
under the foregoing provisions of this section, but not so declared, shall not
be enforceable by the beneficial owner or any person claiming through
him".
Section 153, to which
reference is made in s. 153B, lays down that no notice of trust, express,
implied or constructive, shall be entered on the register of members or of
debenture-holders. Thus, it purports to include obligations in the nature of a
trust as enumerated in Chap. IX of the Indian Trusts Act, 1882.
However, s. 153B when it
makes mention of trusts, does not elaborate the inclusion of implied or
constructive trusts, or what may be termed as obligations in the nature of
trust. The circumstance that sub-s. (4) enjoins the creation of a trust by an
instrument in writing before this section can come into play further tends to
exclude implied or constructive trusts or obligations in the nature of a trust.
One has, therefore, to look to the definition of trust as given in s. 3 of the
Indian Trusts Act for understanding the import of this expression under s.
153B. The same envisages that a "trust" is an obligation annexed to
the ownership of property, and arising out of confidence reposed in and
accepted by the owner, or declared and accepted by him, for the benefit of
another, or of another and the owner.
The Bombay High Court has
thus in the case of Tan Bug Taim v. Collector of Bombay, AIR 1946 Bom 216,
observed that the very heading of Chap. IX and the terms of s. 80 of the Indian
Trusts Act show that the relationships provided for in Chap. IX are not trusts
but obligations in the nature of trusts and, therefore, it cannot be said that
merely because those obligations were enacted within the provisions of that
Act, they were included in the definition or conception of trusts which only
were the subject-matter of the enactment of that Act.
The Patna High Court has
also held in the case of Nandkishore Bajoria v. Gaya Sugar Mills Ltd., AIR 1953
Patna 390, that s. 185 of the Indian Companies Act, 1913, was confined to
trusts as defined in s. 3 of the Trusts Act. Distinction was drawn between an
express trust and a constructive trust. The later category was opined as not
covered by the provisions of s. 185 of the Indian Companies Act, 1913.
From the side of the Public
Trustee, it has been contended that the word "trust" as used in s.
153B has not to be understood in the legal concept as envisaged by the Indian
Trusts Act, but has to be given the common parlance meaning of faith or
confidence reposed. The same was claimed as analogous to trust or confidence or
tacit belief which one may have in another.
In our opinion, however,
when certain terms have become words of well-recognised legal import, they have
to be understood as such when found introduced in any statute, unless they are denned
otherwise or are stated in a different context. There is, therefore, no reason
to ascribe a different meaning to the word "trust" occurring in s.
153B of the Companies Act from what has come to be understood in the context of
the Indian Trusts Act. The Punjab High Court has, in the case of S. Ripudaman
v. Surinder Kumar, AIR 1959 Punj 92, taken note of the implication of a trust
under that Act and observed that it subjected the person, by whom a property
was held, to equitable duties to deal with the property for the benefit of
another, and in the case of an express trust arising from the intention of a
person to create a trust directly or indirectly, it was the manifestation of
intention and not the actual intention which determined whether a trust had
been created. A number of features, it was next held, distinguished a trust
from a contract. Trust always involved an equitable ownership whereas a
contract was a legal obligation based on an undertaking supported by a
consideration, which obligation may or may not be fiduciary in character. The
beneficiary of a trust had the beneficial interest in the trust property, the
beneficiary of a contract had only a personal claim against the promisor.
In the present cases, no
formal instruments of trust stand executed as envisaged by sub-s. (4) of s.
153B of the Companies Act, 1956. However, this circumstance should not preclude
the ascertainment whether the creation of trusts could be deduced from a number
of documents executed between the concerned parties.
Before proceeding further,
it may be relevant here to mention what was the object which induced the
Legislature to introduce the provisions contained in ss. 153B, 187A and 187B. A
perusal, in this respect, of the Guide to the Companies Act, by A. Ramaiya (8th
Edn., 1977), at p. 329, shows that the Finance Minister, while elaborating the
object and scope of these sections at various stages of the Bill, explained
that while the Government had no intention to interfere with the position of
trust equities, it had often happened that certain types of trusts held large
amounts of equities and the people who were in management of these trusts used
those equities for the purpose of having control. Such groups of persons, it
had been noted, were defeating the various other provisions which tended to
limit the amount of control by excessive acquisition of equity capital in their
hands by holding them in the form of trust and then becoming trustees
themselves. The result was that trust funds were being invested and utilised
for furthering the donor's business interests than of the beneficiaries. The
intention of these provisions was, therefore, not to interfere in the affairs
of genuine trusts but to prevent the holding of securities by trusts to be used
by a group of persons for the purpose of augmenting their own voting rights. A
public trustee was, therefore, sought to be appointed to whom the exercise of
voting rights was to be transferred.
We next advert to the facts
of the present cases as to what in substance were the nature of loan accounts
and whether the transfer of shares in the form of extending securities in
favour of the banks did result in the creation of trusts as envisaged by s.
153B of the Companies Act. Ex facie, three factors were already discernible. Firstly,
though the shares stood transferred in the names of the banks, the dividends
accrued on them were credited to the respective cash credit accounts of the
debtors. Thus, the benefit of those dividends was accruing to them. There was
further an obligation to transfer back the shares to the debtors once the
accounts were squared up. Thirdly, according to the Public Trustee, the voting
rights were also being exercised by the banks at the behest of the debtors. In
this way, the main ingredients of trusts were pointed out to be clearly made
out. The present, it is stated, are cases of trust oriented pledges, and not
pledge-oriented trusts. In the former case, it has been pleaded, it did not
make much difference if some element of pledge also co-existed. A pledge, it is
pointed out, normally does not require transfer of ownership. The existence of
such transfers, in the present cases, thus is a pointer to the creation of
trusts and that the banks are holding the shares for the benefit of the
original holders.
From the side of the
petitioners, however, it has been urged that the creation of a trust is
primarily a matter of intention and overt act of the concerned parties. In the
present cases both the debtors and the banks have not claimed that any trusts
have come into being. They make no secret that the transfers of shares were in
the course of extending securities for the loans. None had thus the intention
to create trusts and, therefore, the Public Trustee is not justified to thrust
such trusts on them.
In our considered opinion,
it is the entire course of conduct and dealings which must be kept in view. One
cannot be oblivious that there can be cases where the legal effect of such
course of dealings may, in fact, result in the creation of trusts though the parties
may not have envisaged so. There should be no reason not to give effect to such
trusts if they otherwise satisfy the ingredients of a legal trust. Thus, the
Bombay High Court in the case of Fazalbhai Mills Ltd. (In liquidation), In re
[1936] 6 Comp Cas 351; AIR 1936 Bom 296, observed that fiduciary relationship
may be established without the use of the word "trust". A person may
become a trustee by his own acts and conduct so as to deprive himself of all
beneficial ownership of a property and declare that he will hold the same in
trust for another. The mere fact that the owner retains an interest in the
property would not necessarily go against the foundation of a trust.
However, the significant
factor, which pervades the entire course of dealings is that the transfers of
shares in favour of the banks were effected primarily for the purpose of
providing securities to the loan accounts. It was not within the purview of the
parties, nor was it intended that thereby they were creating any trusts. This
is amply reflected from the circumstance how they have vigorously contested in
these writs the creation of any such trusts. In fact, these transfers seem to
have resulted from the directives of the Reserve Bank of India to which
reference had already been made above. The real object behind them continued to
be to obtain absolute safeguard for the loans advanced. Perhaps it could as
well be said that the necessity for these transfers was dictated by the desire
to secure fully the interest of the bank lest any surreptitious disposing of
those shares by the debtors in any manner took place.
The present are not cases
of the nature where trusts are created to enable individuals to derive personal
advantages by way of control over companies to curb which s. 153B was introduced
in the Companies Act. Rather the banks have obtained transfers of shares for
protection of their own interest and for their benefit. This does not appear
compatible with the creation of a trust as in that case the beneficiary should
be a third party or such party and the owner. Furthermore, a trustee is
generally not entitled to dispose of or appropriate the trust property for his
benefit. In the present cases, however, the rights of the banks to appropriate
the shares to their benefit or dispose them of and utilise the amounts thereof
for adjustment of the loan amounts due to them, in case the debtors do not
discharge them, remain. The obligation requiring the transfer of shares back to
the debtors can only arise where the debtors clear their dues to the banks on
the basis of those loans. All these thus plainly show that the retention of
shares by the banks during the subsistence of the loans is for the protection
of their own interest.
In so far as the credit of the
dividend amounts received by the banks in the cash credit accounts of the
debtors, it would, no doubt, seemingly appear that the beneficial interest in
those dividends remains with the debtors. However, a careful scrutiny would
bring out that this is what superficially seems to be so. In reality, the banks
are partly recovering the amounts of the loans advanced by them by
appropriating the dividends towards the amounts due to them.
We are further of the
opinion that there appears no basis for the Public Trustee to assume that the
voting rights are retained by the debtors even after the transfer of the shares
to the banks. The Reserve Bank directive in this regard makes the matter
sufficiently clear. It is enjoined that those voting rights are exercisable by
the banks only, and that too under the directions of the Reserve Bank. Thus, an
equally independent body keeps supervision and control over the exercise of
those voting rights which can rule out any connivance of misfeasance. There is
nothing to assume that the banks have any ulterior objects to enter into
collusions to enable individuals to derive personal gains or to unwarrantedly
abdicate their voting powers incidental to the transfer of shares in their
favour, which the Reserve Bank has so specifically required to be retained. The
Reserve Bank plays as good a role as a watch dog in this respect as the Public
Trustee could, and in case of any default, the Public Trustee may in his
advisory capacity guide the Reserve Bank.
We are, therefore, of the
considered opinion that in the circumstances of the present cases, it could not
be said that any trusts were created when the banks got the shares in dispute
transferred in their favour as a sort of security for the loan amounts advanced
by them.
As regards the locus standi
of the Gwalior Rayon to move the writ, it was clearly there, as it would have
suffered penalties in case it did not serve notices and other documents on the
Public Trustee. The Sutlej Cotton, however, it seems has no right over the
shares as long as they stand transferred in favour of the bank and the loan
amount is not discharged. However, it cannot here also be ignored that the
transfer of these shares was in the context of extending security to the loan
and the company has a right to obtain back their transfer as and when the loan
is discharged.
The result, therefore, is
that we allow these writs to the extent that the notices issued by the Public
Trustee to the petitioners and the Punjab National Bank are quashed, and the
Public Trustee is restrained from proceeding against the petitioners for any
violation of those notices. Looking at the circumstances, we make no order as
to costs.
Ranganathan J.—I agree. I think that in interpreting s. 153B one should
give due weight to the very careful language used in it, particularly when
considered in contrast with that employed in s. 153 and s. 187C. Section 153 is
very widely worded and embraces within its sweep all types of trusts, express,
implied or constructive. Section 187C, again, though somewhat akin to s. 153B,
has a wide application and seeks disclosure of all types of beneficial interest
in shares; in particular, sub-s. (6) thereof covers, by specific mention,
charges, hypothecation and all types of agreements "created, executed or entered
into" in relation to any share. Section 153B, on the other hand, is narrow
in scope and takes in only cases where shares are held by a person under a
trust created by an instrument in writing. The decisions referred to by my
learned brother show that the expression, "trust", used in similar
contexts, has been held applicable only to express trusts and as not
appropriate to comprehend obligations in the nature of trusts or constructive
trusts. Having regard to these considerations, I think that s. 187B is attracted
only where one or more documents expressly create or constitute a trust in the
full sense of s. 3 of the Trusts Act where a person transfers property to
another with certain obligations annexed thereto as a result of confidence
reposed by him in that other and declared and accepted by the other and not
merely where some sort of fiduciary obligations can be spelt out from several
documents executed by and between the parties.